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Issues: (i) Whether shortage of 594.25 kgs of cone yarn established clandestine removal and duty demand; (ii) whether removal of 4559.7 kgs of staple fibre roving ends to a job worker without debiting 10% of value under Rule 57F(6) sustained the duty demand and extended limitation; (iii) whether penalty under Section 11AC could survive when the duty demands failed.
Issue (i): Whether shortage of 594.25 kgs of cone yarn established clandestine removal and duty demand
Analysis: The shortage was explained by the factory manager and the managing director as arising from re-winding of defective cones. Their explanation was not rebutted by any positive evidence from the department, and the alleged clandestine removal rested only on shortage and assumptions. Clandestine removal requires affirmative proof by the department and cannot be presumed from mere shortage.
Conclusion: The demand relating to 594.25 kgs of cone yarn was not sustainable and was set aside in favour of the assessee.
Issue (ii): Whether removal of 4559.7 kgs of staple fibre roving ends to a job worker without debiting 10% of value under Rule 57F(6) sustained the duty demand and extended limitation
Analysis: The inputs were admittedly sent to the job worker, processed, and returned to the assessee. The stage contemplated by the rule had already run its course by the time of the visit. On those facts, the demand under Rule 57F(6) was infructuous. The transactions were also revenue neutral, so no intent to evade duty could be inferred and the extended period of limitation was unavailable.
Conclusion: The demand relating to 4559.7 kgs of staple fibre roving ends was not sustainable and was set aside in favour of the assessee.
Issue (iii): Whether penalty under Section 11AC could survive when the duty demands failed
Analysis: The penalty was equal to the aggregate of the duty demands. Once both duty demands failed, the foundation for the penalty disappeared. A penalty under Section 11AC cannot be sustained where no duty survives.
Conclusion: The penalty was unsustainable and was set aside in favour of the assessee.
Final Conclusion: The order of the lower authorities was set aside in entirety, resulting in complete relief to the assessee.
Ratio Decidendi: Clandestine removal must be proved by positive evidence and cannot rest on conjecture or shortage alone; where duty is not payable and the transaction is revenue neutral, the extended period and consequential penalty under Section 11AC cannot be sustained.
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